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Social Network And SMEs Finance

Posted on:2015-08-26Degree:DoctorType:Dissertation
Country:ChinaCandidate:J H MiFull Text:PDF
GTID:1109330464459237Subject:Western economics
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35 years of reform and opening up, China has achieved great results; over 35 years of successful reform and GDP growth policies have given local government great incentive for economic development. Although GDP growth policy has many advantages but also facing great shortfall and challenge. Meanwhile, after 35 years of rapid development the Chinese market reform has entered a bottleneck position, the continuous growth of Chinese economy need change toward the "Factor Markets".SMEs (Small and Median Enterprises) play a major role in economics growth. SME, in fact, have contribution to the most job creation, yet one should focus on the net job creation of SME, rather than the gross job creating, as startup firm have high failure rate. Each year there are many start-up SMEs, which generate numerous jobs and enhance the economic growth, however, in the same time, there are also many SMEs close up. One hypothesis argues that compared to large firms, SMEs are more labour intensive, in developing country. As it compared to developed country, are relatively labour abundance, so SMEs are consistent with characteristic of developing country therefore can enhance its job creation.SMEs financing evolve with solve the asymmetric information issue. Schools of literature indicate that peer monitoring and capitalizing the social capital is the optimal solution to SME’s financing issue. Furthermore, microfinance and social network mechanism (group lending, co-sign, co-op) can solve the asymmetric information problem between bank and SMEs. Therefore, add a middle man (microfinance institution) between banks and SMEs can achieve the second best solution. Furthermore, study the network structure of SMEs finance is vital to our understanding of optimal SMEs finance structure.Credit constraint is a binding constraint for developing economies (Banerjee,2002), especially for small and medium sized enterprises (SMEs), as institutions in developing world are usually weak and firms cannot not post enough assets as collateral for the loans, contributing to a self-sustaining poverty trap. However, As Arrow (1974) points out, that trust can be built as an important lubricant of an economic system to mitigate the market failures.If trust is low,poverty can persist because individuals are unable to acquire capital,even if they have strong investment opportunities.If trust is high,informal transactions can be woven into daily life and help generate efficient allocation of resources. In this case,SMEs can endogenously form social networks and create "social collateral"to relax the credit constraint, as has been well studied and documented in the microfinance literature (Murdoch and Armendariz,2007)Although there is a large literature on the role of social collateral in credit market, there is little research on how the structure of the networks affects the credit markets. Recently, there is some work try to fill this void.Banerj ee et al (2012), a paper mostly related to ours,studies how social networks affect the diffusion of participation in a microfinance program,and find that the diffusion of microfinance is enhanced by network.Karlan et al. (2009)also relate network structure to trust and find that dense networks generate bonding social capital and they find empirical evidence for the positive role of network in the informal borrowing.SMEs’credit constraint has significantly obstructed growth of Chinese economy. Firms are unable to capitalize their social capital therefore face credit constraint.Capitalizing the social capital can significantly mitigate the asymmetric information problem between firms and banks. Furthermore, group lending is a solution that utili zes firm’s social capital and mitigates credit constraint faces by firms. In addition, the network structure of firm’s financing channel is critical in utilize social capital. Therefore, study network structure can offer fruitful insight to SMEs’ finance.In this study, through study on SMEs we need understand the critical setback on financial markets reform. The key problem of the SMEs financing is that there are serious information asymmetry between banks and SMEs. Information asymmetry causes bank unable to process the soft information provided by SMEs. All successful SME lending program has some kind lending mode to analyzing non-standardized information (soft information). Therefore, the main focus of the future of financial reform is to set up a diversified banking system (large banks lend to large enterprises, small banking lend to SMEs). The diversified banking services within the context of social network analysis framework is the solution of financial reform.
Keywords/Search Tags:Network
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